Homebuyers and Homeowners: they cut the interest rate again, how much we save?

by Chris Lang on November 5, 2008

Mortgage stressIf you’ve been reading Homeiown for a while, you know I don’t usually do the news here – simply because it doesn’t make any sense to re-publish stuff other websites are full of. This time, when they announced the third successive interest rate cut, I made an exception, because I want to explain what it means to the home buyers and the home owners.

If you have no idea what interest rate is, read this paragraph, but if you do – skip and go to the next one. Interest rate is the percentage rate paid on your bank savings account, it is also the percentage rate charged on a loan – such as mortgage. The way things work is that Federal Reserve Bank sets the global interest rate nation-wide and then each bank changes their rates according to the global interest rate. For example, if the global rate moves up – the earnings on your savings account will probably increase, but if you are paying a mortgage at variable rate – you will also start paying more.

A bit of background: the interest rate earlier this year was cut 2 times and this is the third time. Its peak was at 7.25% in September. The first cut was of 0.25 %, then 1% and now the last cut was 0.75 %. It looks like such a small figure – I mean what’s a 0.75 percent, right? WRONG!

If we compare how much a household with a 300,000 mortgage will pay now to what they were paying 2 months ago, we’ll see that they save $390 monthly, which means $4680 annually.

These figures will give you a good idea of how much you save on a mortgage:

  • On a mortgage of 200K the monthly repayment before the cut was $1660, after the cut you save $260 a month, $3120 a year.
  • On a mortgage of 300K the monthly repayment before the cut was $2490, after the cut you save $390 a month, $4680 a year.
  • On a mortgage of 400K the monthly repayment before the cut was $3320, after the cut you save $520 a month, $6240 a year.
  • On a mortgage of 500K the monthly repayment before the cut was $4150, after the cut you save $650 a month, $7800 a year.

This piece of news affects us all – people who own a house, people who think of buying a house and even people who are starting to build their own house, because all the loans are affected by interest rate change – now we can borrow money for less. Add to that the new FHOG and we are in a much better position than we were 2 months ago.

And now to the bigger picture – the reasons for this third interest rates cut was to avoid recession. I am sure you have heard about the global economy slowdown, some countries are doing better, some are worse and our government is trying to make sure Australia doesn’t go into recession, which would mean job losses for a lot of people, financial stress, etc. If our country was a train, speeding towards recession, then interest rate would be a break they use – so that we would only go into a slowdown, which is unavoidable anyway, but not into recession.

{ 4 comments… read them below or add one }

Atlanta Bad Credit Home Loan January 5, 2009 at 1:47 pm

Here in the United States, interest rates have recently been cut to their all-time low, mainly to try and bolster our struggling economy through the current recession.

The burst of the housing bubble has also made houses much more affordable. When you put together more affordable houses and all-time low interest rates, this is the ideal time for first-time home buyers, since their buying a house is not tied to selling an existing one.

The problem is that credit has also tightened, so getting a loan approved for that more affordable than ever house is turning out to be quite a challenge, since financial institutions have been badly burned.

But all in all, those interest rate cuts sure are welcome in a time where everyone pretty much around the world is penny-pinching.

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gamer gal January 12, 2009 at 1:23 am

Here in America they are trying different mortgage plans to help out many home owners because in some states the foreclosure rate is at a all time high now. Many home owners are just packing up and walking away from their homes being they cannot afford the mortgage on them anymore. Some places are ballooning the mortgage payment up over night and not giving any warning to the home owners. I just hope that the save plans they have here make more owners stay place with their homes. Thank you for sharing how it is over there was really wondering if other countries homes and home owners were affected badly by the struggling economy that we all are having to deal with these days.
gamer gal

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Chris January 12, 2009 at 11:43 am

Here in Australia many people are looking at the US as their possible future situation. You guys were there first and luckily our government is trying to learn and to avoid hitting the rock bottom that you’ve hit first. It makes me so frustrated to see how people that were seduced into living beyond their means are paying the price now.

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Interest Rate Comparison September 9, 2009 at 9:37 pm

Hey, thanks for this info. Very interesting just how much you can save on a mortgage when you try. It also helps to compare interest rates with other banks and decide if it is worth moving to another provider to save in repayments

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